A Primer on Credit Default Swaps (CDS)

University of Chicago - Irving B. Harris Graduate School of Public Policy Studies; Close Mountain Advisors LLC

Date Written: December 29, 2009

Abstract

The market for Credit Default Swaps (CDS) has grown from nothing just fifteen years ago to a huge market today. For a plain-vanilla single-name CDS this primer aims to answer the questions: What is a CDS? How does a CDS behave in response to changes in the markets? How does one value a CDS? What is the risk? The short answer to these questions is that a CDS behaves, in almost all respects, as a leveraged or financed floating-rate corporate bond. This means that anyone acquainted with corporate bonds understands the most important aspects of a CDS.